Market Structure Map

Helping IROs understand short-term market structure to maintain long-term peace of mind.

Sep 10-14—Quants Confident as FOMC, Quad-witching, Mark Mid-September

Intriguing month so far, huh, IROs? Let's survey three market structure items today, looking back at last week's data for our basis:

Quants. We've wondered whether quantitative investors like the Global Alpha Fund at Goldman Sachs, down 22.5% in August, would suffer a buyside crisis of confidence. They may still, but if trading measures temerity, Goldman remains bold. For Sep 10-14, Goldman had both its agency and crossing-platform desks in our Volume Top 25 report and tallied 4.6% of total order flow. Impressive. We also today tuned to an NYSE-Arca IR conference call that included Goldman exec Jay Knopf from that firm's derivatives unit. Addressing concerns about quant models, Knopf noted that correlation shortcomings in quant models stemmed from a tiny proportion of code in black-box strategies, things that programmers can and do correct, real-time. Whatever the case, Speculative volume is up by a couple percentage points thus far in September—supporting our belief that real-time traders have won some business.

Quad witching. This coming Friday marks Quad-Witching #3 for 2007, when index and equity puts and calls expire. On the call mentioned above, panelists agreed that quad-witching is nearly a non-event. True for traders perhaps, because liquidity issues resolve themselves in preceding days (as we've explained before). But not for IR folks. We've observed that monthly options expirations have a pronounced effect on whether single-issue equities appreciate or not in the second half of the month (yet more reason to know your market structure). Why does this happen? We think because forward pricing on derivatives of funds and indices in program-driven models sorts which baskets of securities are on the long and short sides of risk-management strategies. It's the way of today's equity markets, IROs. Orwellian—kind of like the FA-18 jet fighter, which needs computers more than pilots to stay aloft (a little wry humor there).

Fed Open Market Committee. We'll only observe that real investors got out of the way of trading systems in early September, perhaps anticipating that programs would have the upper hand if FOMC action proved better or worse than expected. While we noticed spotty buy-the-dips activity in our data sample on 9/13-14, trading systems quickly trumped liquidity and investors weren't willing to push the issue. What's that mean, IROs? Well…read last week's Market Structure Map. It's hard to get results from investor visits and conferences in the first half of September when 80% of liquidity is hedged, capped, collared, swapped, borrowed, levered…you get the point.

What now? We think equity markets will simply reset a little higher before returning to prevailing volatile conditions.

 

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Market Structure Map

Our weekly Market Structure Map provides unique insights — free — on trading markets, with an exclusive focus on helping investor-relations professionals keep cool in the IR chair.

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